Commentary

Central banks have checked into Hotel California

Commentary: They’ve started quantitative easing and can never quit

By

MatthewLynn

LONDON (MarketWatch) — The Septaper has been put on hold. So welcome instead to the Octaper. And once that is off the table perhaps we’ll hear about the Decender, to signify an end to money printing around Christmas. And once the decorations have been taken down, and the trees put into the trash, the Nexit will be the main topic of discussion — the New Year exit from quantitative easing.

Give it another year, and this process is going to have more acronyms flying around than an IT department.

But in fact, central banks are going to find it a lot easier to talk about ending the QE programs they started back in 2008 and 2009 than actually doing it. Quantitative easing is increasingly like the Hotel California that the Eagles sang about: you can check out any time you like, but you can never leave.

The only historical experience we have of central banks printing money on this scale is Japan. It started QE all the way back in 2001. Getting on 13 years later it is still going strong. There is no reason to think that the U.S., the U.K., or any of the other countries that have started printing money will be any different.

The central banks have been having a lot of trouble getting a clear message through to the markets about what their plans for monetary policy are right now.

MarketWatch

Quantitative easing has built up the Federal Reserve’s balance sheeting, and there’s no sign of stopping.

The Federal Reserve is the biggest, and naturally enough, the most important example. It started making noises about ending its monthly round of printing money back in the spring. No doubt officials were sincere when they talked about the need to bring the stimulus to an end. After all, QE was presented as a one-off, temporary response to a crisis, not as a permanent long-term program.

And yet when it came to actually doing it, rather than just discussing it, they looked at the jobs data, the sales data, and the confidence indexes, and decided that it was not worth the risk. Better to carry on instead.

Getty Images

Federal Reserve Chairman Ben Bernanke .

The Fed is far from alone. Mark Carney, the new governor of the Bank of England, has been creating just as much confusion. When he came into office, he launched a policy of “forward guidance” to tell the markets where interest rates would be several years ahead and under what conditions more QE might be thrown at the economy.

And what happened? Traders immediately started pushing interest rates up rather than down, the reverse of what the governor wanted to happen.

Mario Draghi, the president of European Central Bank, launched a version of QE lite — the long-term refinancing operation, which pumps cheap money directly into the banking system — as an emergency measure, but this week was discussing extending it indefinitely.

Going forward, we’re going to start hearing about different dates for the end of QE. St. Louis Fed President James Bullard argued last week that October was a possibility. Pretty soon we’ll be hearing talk of December, January and then … well, you get the pattern. Each time, there will be discussion about ending QE — and each time the central banks will pull back from the brink.

There is no reason to be surprised at that. It is what the historical record tells us will happen. The first experiment in QE was launched by the Bank of Japan back in 2001. Just as in the U.S. and the U.K., it was presented as an emergency measure designed to pull the economy out of a damaging long-term slump. As it turned out, there was nothing temporary about it. The Bank of Japan has kept on printing money for 13 years, and there is no end in sight — indeed, it has been printing in ever larger amounts.

The U.S. and U.K., and the euro zone in due course, will be no different. In fact there are three reasons why QE programs are so hard to end.

First, there is no real cost to it. The critics of QE argued it would lead to hyperinflation, drawing grim comparisons with Weimar Germany and forecasting we would all soon be wheeling our banknotes around by the barrow-load.

Maybe it will happen one day, but right now there is no evidence of it. In Japan, inflation has barely ever struggled above 2% since QE was launched, and prices have fallen as often as they have risen. Inflation has been coming down in the U.K. since QE was started, and is certainly no worse than its long-term levels. The same is true in the U.S.

You might argue the numbers have been fiddled slightly by taking some items out of the indexes used to calculate the rate at which prices are rising. But if this was Weimar Germany I think we’d have noticed. If there is no real inflation, then QE does not have any genuine downside to it. The central banks don’t even actually print the money — they just magic the stuff up on computer screens. The result? There is not much incentive to stop.

Next, economies remain fragile. Printing money may stop economies from collapsing but it does not promote real, sustainable growth. That depends on factors such as technology, innovation, tax rates, education, infrastructure, and population growth — not the supply of money. But if economies stay sickly, that makes central banks even more reluctant to end QE, because they fear it will do too much damage.

Finally, the one thing we know for sure is that ending QE will hit the stock market. Central bankers may pretend that they don’t worry about that, but the reality is that they do. The state of the markets dominates the headlines, and that impacts confidence, which certainly does affect the economy. Being cynical, central bankers are also the kind of people with big stock portfolios, and they probably don’t want to see them tank.

The conclusion? Ignore talk of a taper in October, after Christmas, or next year. Ending QE is going to be impossible, because it is hard to see the downside to carrying on, and easy to see the downside to ending it. It is all risk and no reward.

Just like the Hotel California, it doesn’t matter whether you want to check out or not — you can never leave. And the markets are about to learn that over the next couple of years.

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